Clarity in the Midst of a Volatile Gas Market
The gas market has been fickle of late, to say the least, unpredictable and full of change. There are lots of aspects which can affect it and the performance of it in our markets. First things first, exactly where does our gas come from?…
Source: British Gas
Now we know where it comes from, let’s look at its recent performance from a market perspective…
Gas prices in June were at two-year lows and winter 19 contracts dropped to a near 15 month low as the warmer temperatures reduced demand.
Liquefied Natural Gas (LNG) production for the vast majority of this year has been very healthy with an influx of tankers reaching UK shores. Strong Norwegian flows have also kept the gas system well supplied and played a big part in gas prices decreasing.
Whilst prices have been in a comfortable position in recent weeks, gas has seen huge spikes overall so far this year due to the following reasons;
- Oil prices up due to an incoming tropical storm in the Gulf of Mexico, forcing production platforms and rigs to close.
- US crude oil stocks have fallen further than expected in the last week.
- Demand for coal has been up in Asian markets.
- The price of carbon has reached record highs.
- Norwegian gas plant has suffered outages.
Carbon emission allowances have skyrocketed to an 11-year high level, now trading above €28/tCO2e. The newly nominated president of the European Commission has promised to deepen cuts on greenhouse gas emissions (GHG) for 2030. By moving the goal from 40% less GHG emissions to 50%.
Oil prices continue to go from strength to strength, now trading around $67/bbl. There is a storm in the Gulf of Mexico which could impact crude production in the region. In addition to that, ongoing tensions in the Middle East are heightening and adding support to oil prices. Recently three Iranian ships have attempted to intercept a British oil tanker as it was going through the Strait of Hormuz. The British tanker was set free after the Royal Navy issued verbal warnings.
The inevitable Brexit effect
There is also the added uncertainty around Brexit, the UK could be vulnerable to gas supply shortages with EU nations restricting gas exports to the UK during winter cold snaps in order to prioritise their own citizens. As we can see from the infographic above, the UK imports almost half the gas we consume via pipelines from Europe, which demonstrates our vulnerability.
EU nations would theoretically have the ability to impose tariffs on their gas and electricity exports to the UK post-Brexit, which is an aspect which we need to be conscious of.
Unfortunately, the UK has become overly dependent on imported natural gas to meet its winter fuel needs. This is because the UK’s own North Sea gas supplies had wound down, while at the same time the country had shut down much of its gas storage infrastructural capacity.
The past year
For an overall view of the past year see the graph below…
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Article written by Ben Mason, Corporate Pricing Analyst